Should I invest internationally?
Updated: Feb 1
Yes. Investing internationally provides a significant benefit to almost every investor.
Global capital markets
The U.S. capital market makes up about half of the world capital market. But many Americans invest only in the U.S. By doing so, they are forgoing significant investment opportunities.
Adding an international component to your investment portfolio
What it is: International investing means investing part of your portfolio in the securities of companies in foreign countries and the securities of foreign governments. Examples of such securities include U.K. government bonds, Japanese stocks and German corporate bonds.
Why it’s useful: Adding international investments to a U.S.-only portfolio can increase the portfolio’s diversification. This in turn can decrease the portfolio’s risk without decreasing its long-term growth rate. In short, adding an international component can reduce the risk of your portfolio without harming its long-term growth rate (rate of return).
How does this work? International stocks tend to behave differently than U.S. stocks. An event like the Federal Reserve raising interest rates has a different effect on U.S. stocks than on European stocks. And as long as U.S. stocks and European stocks do not move in lockstep with one another (are not perfectly correlated), they will partially offset each other’s risk without offsetting each other’s long-term growth rates.
How it’s implemented: By investing in the investment funds which hold the securities of the countries or regions which provide a significant diversification benefit. For example, we know the stocks of developed economies outside the U.S. provide a diversification benefit to a portfolio of U.S. stocks. We could invest in these stocks by purchasing shares of one of the many funds which track the Developed World Ex-U.S. Stock Index.
How does this benefit me? Adding an international component to a portfolio of U.S. stocks and bonds can reduce the portfolio’s risk without affecting its long-term growth rate. And reducing a portfolio’s risk makes it more robust to volatility in stock and bond markets.
Putting it all together
Adding the right international investments to a portfolio of U.S. stocks and bonds will increase the portfolio’s diversification. Increased diversification means decreased risk without a decrease in the long-term growth rate. And decreased risk means increased protection against downturns and hence a smoother path to your investment goal.
Dr. Andy Lawson is the principal of Freshfield Investments, a Registered Investment Advisory firm in Plano, Texas serving clients locally and nationwide. Freshfield provides investment management and financial planning as a fee-only, fiduciary. To book a virtual or in-person complimentary consultation, please visit our Contact page.